The future economy of oil from the Middle East and across OPEC

Speech delivered by HE Mohammad Sanusi Barkindo, OPEC Secretary General, at the International Petroleum Week, 21 February 2017, London, England.

Ladies and gentlemen,
Good morning.

It is a great pleasure to be in London for this year’s International Petroleum (IP) Week. I would like to thank the host of this prestigious conference, the Energy Institute, its Chief Executive, Louise Kingham, as well as the IP Week Programme Board, for the invitation to participate in this important and timely conference.

The last time I spoke in London was at the Oil & Money conference in October 2016. It may only be four months ago, but from the perspective of OPEC, and the oil industry as a whole, a lot has happened in the intervening time.

My discussions back in October 2016 were focused on OPEC’s ‘Algiers Accord’ adopted at the 170th (Extraordinary) Meeting of the OPEC Conference on September 28. At this meeting, the OPEC Conference opted for an OPEC production target ranging between 32.5 and 33 million barrels a day (mb/d), in order to bring the market rebalancing forward.

The focus and preoccupation was the unprecedented build-up of inventories over the period 2015/2016 that dislocated oil market fundamentals and sent oil prices plunging by as much as 80 per cent.

The ‘Algiers Accord’ was a landmark achievement for the Organization and the industry, and I recall the optimism portrayed by His Excellency Khalid Al-Falih, Saudi Arabia’s Minister of Energy, Industry & Mineral Resources who was speaking at the same October conference. However, I recall that in some quarters doubts were raised about whether OPEC could actually implement the ‘Algiers Accord’ in a full and timely manner.

Scepticism was also voiced loudly about the ability of OPEC to bring non-OPEC producers on-board, following the decision in Algiers to develop a framework of high-level consultations between OPEC and non-OPEC.

Despite this pessimism, OPEC embarked on the most extensive consultations among OPEC Member Countries and between OPEC and non-OPEC producing nations. At the same time, we also undertook deliberations with the broader international community and other multilateral organisations to further build consensus about the strategic urgency of restoring sustainable oil market stability.

The intervening period between the ‘Algiers Accord’ on September 28 and the ‘Vienna Agreement’ on November 30 was no doubt one of the most challenging and intense periods in recent oil industry price cycles.

The shuttle diplomacy that was undertaken across the world and the encouraging and consistent advocacy in a variety of international energy platforms and fora, facilitated consensus and commitment. This was crucial in the adoption of the ‘Vienna Agreement’ at the 171st Meeting of the OPEC Conference and the Declaration of Cooperation with non-OPEC countries on December 10.

For the first time in the history of the industry, 13 OPEC nations and 11 non-OPEC participating countries, led by the Russian Federation, came together to help rescue and stabilize this strategic global industry – one that has been vital to the development of modern civilization.

To achieve this historic feat, our Heads of State and Government, Ministers, Ambassadors, and many officials from the 24 participating countries, both individually and collectively, played decisive roles in the run-up to these landmark decisions.

Through a shared vision, among both OPEC and non-OPEC producers, collaborative and timely intervention was taken to address the prevailing market realities. It was a commitment to all oil industry stakeholders, both producers and consumers, as well as one to the broader global community, through the restoration of oil market stability and the potential positives of this for the global economy.

To implement these timely decisions, a Joint Ministerial Monitoring Committee (JMMC) was also established, which met for the first time in Vienna on January 22. The adoption of the framework for oversight and monitoring implementation, which now also involves a Joint Technical sub-Committee that will meet for the first time on February 22 in Vienna, is both innovative and unique.

They are also further prime examples of OPEC’s support for data sharing, openness and transparency. This is supported by the launch at the end of last year of the first-ever OPEC Annual Statistical Bulletin Smart App. This App makes the ASB’s content of OPEC data, as well as other international oil and gas data, available from any mobile device, at any time, on any day, from anywhere.

In OPEC’s most recent Monthly Oil Market Reportthe production data for January shows conformity from participating OPEC nations above 90 per cent. Moreover, all countries involved remain resolute in the determination to achieve a higher level of conformity.

We are also determined to realize the joint conference decision to strengthen and sustain this cooperation between OPEC and non-OPEC. We want this to be a lasting and flexible partnership that when necessary can help reduce volatility, provide more confidence to the market, and steer a path towards more sustainable stability.

In the short-term it is expected that this cooperation between OPEC and non-OPEC, alongside recent indications of some improving macroeconomic conditions, will see the rebalancing process brought forward and more stability return to the market. I cannot over stress how vital this is, not only to the industry, but the global economy too.

It was evident in the last quarter of 2016 that total OECD commercial oil stocks were falling, and it is expected that we will see a further drop during 2017, as a result of these decisions and developments. We will continue to focus on the level of inventory drawdown to bring the level closer to the five-year industry average.

These decisions should also mean that prices stabilize at levels that are more conducive to the kind of investments the industry needs, specifically by lessening the financial and operational stresses for companies and reducing the pressure to cancel or postpone planned projects. We believe as the market rebalances the price will find its equilibrium.

The gravity of the sharp contraction in oil industry investment is underscored in the fact that in both 2015 and 2016 we witnessed a dramatic rationalization of projects. Global oil and gas exploration and production spending fell by around 26 per cent in 2015 and a further 22 per cent drop in 2016. Combined, this equates to above $300 billion. This has impacted new projects coming on-stream and new discoveries too.

To put it simply: the industry cannot afford to see investment levels fall for a third year in a row!

Stability today is also vital for stability in the future, given that the oil industry is very much a medium- to long-term business.

Moreover, the industry remains a growth business. We see the world requiring more oil in the years ahead. Oil will remain a fuel of choice for the foreseeable future.

In OPEC’s latest World Oil Outlook, oil is still expected to supply over 26 per cent of the world’s energy demand by 2040. Oil demand increases by around 17 mb/d between 2015 and 2040 to reach close to 110 mb/d.

This will require significant investments. And new barrels are needed to not only increase production, but also to accommodate for decline rates from existing fields. Overall, we see oil-related investment requirements of around $10 trillion over the period to 2040.

The industry needs regular, timely and sustainable investment to guarantee security of supply to the global community. It is essential for our industry’s future and that of the global economy. It is essential to all those consumers around the world who rely on hydrocarbon resources for their everyday needs. And it will be essential to the future of those currently without access to modern energy services.

In this regard, we should not forget that today 2.7 billion people still rely on biomass for their basic needs, and 1.3 billion have no access to electricity. The energy transition should take this global challenge into account.

It is also important to note where we expect these future supplies to come from. In OPEC’sWorld Oil Outlook, it is projected that non-OPEC liquids production will see a recovery in the medium-term, after dropping considerably in 2016. However, it plateaus over the next decade, reaching 61.4 mb/d in 2027, before declining to 58.9 mb/d by 2040.

In the long-term it is OPEC that will be required to meet much of the expected additional demand. In terms of crude, OPEC’s supply is estimated to increase to 41 mb/d by 2040, an increase of around 9 mb/d from 2016, while non-OPEC is anticipated to witness an overall decline of 2 mb/d. In terms of all liquids, the increase for OPEC is close to 12 mb/d from 2016, and for non-OPEC there is growth of about 3 mb/d.

It means that the estimated share of OPEC crude in the total world liquids supply in 2040 is 37 per cent, which is three percentage points higher than the 2015 level.

To meet its obligations as a secure and reliable supplier of oil to world markets, OPEC Member Countries remain committed to investing in new capacity and necessary infrastructure, despite the downturn we have witnessed in the last couple of years.

We believe that the recent decisions taken by OPEC and non-OPEC are already creating the favourable conditions for the industry to deliver the necessary medium- and long-term investments for our energy future.

Ladies and gentlemen,

There are, however, many other challenges for oil markets, such as: the prospects for the global economy; excessive speculation and the role of financial markets; the impact of geopolitics; advances in technology and their impacts on exploration and production; policy uncertainties in a number of leading producing and consuming countries; and environmental and sustainable development concerns.

Allow me to share with you our views and perspectives with regard to a major topical issue of our time – climate change. It obviously has the potential to impact energy demand, the overall energy mix and the future economy of oil.

Let me stress that OPEC not only welcomed the Paris Agreement on climate change from COP 21 and its early enforcement toward the end of 2016. Our Member Countries played an important role in reaching the Agreement – and they will also play a role in its implementation.

All 13 OPEC Member Countries have signed the Agreement and all are in the process of ratifying it.

I should also highlight here that I visited Bonn in October 2016 to meet with Patricia Espinosa, Executive Secretary of the UN Framework Convention on Climate Change (UNFCCC), to enhance cooperation between the UNFCCC and OPEC. This collaboration is a new and positive development that was welcomed by the UNFCCC.

It is vital, however, to remember that the implementation of the Paris Agreement should continue to be guided by the principles and provisions that were provided for in the UNFCCC. The unique situation of developing countries, in particular, should be given the priority it deserves, including those developing countries dependent on oil.

In terms of the energy mix, we can expect to see a further shift towards renewables in the coming decades. Let me stress that OPEC is greatly supportive of the development of renewables. Many of our countries have vast sources of solar and wind, and significant investments are being made in these fields.

Of course, we also acknowledge the challenges of emissions that come from burning fossil fuels. In this regard, we recognize the need to use energy efficiently and to continually look to develop and adopt cleaner energy technologies, such as carbon capture and storage and many others in the future. I am a believer that solutions can be found in technologies that reduce and ultimately eliminate these emissions. In this regard, I welcome coordinated action with the industry and through various research and development platforms.

Ladies and gentlemen,

We remain optimistic about a sustainable future for oil. We believe it will continue to play a central role in helping provide heat, light and mobility to billions of people across the world, and we believe it will continue to help drive the economies and the diversification of our Member Countries.

The focus needs to be on sustainable oil market stability. It is the concern that links us all.

Stability is vital for security of supply and security of demand, which are in turn both vital to stable investments and future capacity expansion. This is beneficial to both producers and consumers.

To put it simply: oil market stability is one of the central pillars of a well-functioning global economy.